Strategic Management What is Strategy and the Strategic Management Process?

1. Strategic ManagementWhat is Strategy and the Strategic Management Process? Mohammad Najjar, PhD Management Science

2. Learning Outcome At the end of this chapter you will be able to: Understand what is strategy. Describe the strategic management process Explain each dimension of the strategic management process Gain, through case studies, a practical experience of the importance of strategic management

3. Chess Game: What We Actually Do? The game of chess is all about positioning your own pieces to gain advantage. The most advantageous positioning depends on: the current positioning of your own pieces, the current positioning of your opponent’s pieces, the expected future positioning of your opponent’s pieces, and the desired future positioning of your own pieces.

4. Chess Game: What We Actually Do? Therefore, one needs to understand the implications of current positioning and have an idea of what positioning the opponent is likely to adopt in the future.

5. Case Study: Walt Disney Company 1984 Profits: $242 Million Theme Park Operations: 77 percent of profits Consumer Products: 22 percent of profits Filmed Entertainment: 1 percent of profits

6. Case Study: Walt Disney Company Hired Michael Eisner - 1984 1. Increased admission prices at theme parks (used existing resources) 1984 - $186 m 1989 - $787 m 2. Focused on movie studios and character development (used existing resources) 1984 - $2.42 m 1994 - $845 m • Diversified into television (ABC), hotels, retail stores, • sport team, cruise line, publishing, consumer • products, licensing, etc. (acquired new resources) Market Cap: 1984 = $2 billion 1994 = $28 billion

7. Strategy Definition Strategy: A firm’s theory about how to gain competitive advantages, may need a plan and a set of coordinated actions Eisner’s theory may have been: People will pay a premium price for extraordinary entertainment. We have the necessary resources to create extraordinary entertainment. Therefore, let’s redeploy our resources in a different way and offer something extraordinary to people.

8. Strategic Management as a Process: External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Internal Analysis

9. Strategic Management as a Process: Eisner went through a process—it may not have been exactly this process. For example, Eisner did not instantly decide to upgrade the theme parks. He went through a process of analysis before he came to the conclusion that updating the theme parks and increasing the admission price would likely lead to higher profits.

10. Strategic Management: Mission A firm’s mission is its reason for existence My mission is to give students a remarkable and superior experience to succeed in their jobs, and therefore their life. Example: After short, but very successful careers in investment banking, two sisters started a shoe company. Their father had been a steel worker whose feet were badly injured in an industrial accident. These sisters were anxious to start a firm that had significant meaning to them. The mission of their new firm was “to provide the safest, highest quality shoes to the steel construction industry.” As you might imagine, they were passionate about the mission of their new firm: Steelcon Shoes.

11. Strategic Management Process and the Mission: External Analysis Strategic Choice Strategy Implementation Competitive Advantage Objectives Internal Analysis Mission

12. Strategic Management: Mission The mission of the firm should inform all other parts of the strategic management process. Objectives should flow from the mission. External and internal analysis should be done with an appreciation for the firm’s mission. Strategic choices should reflect the mission. strategic implementation should be done with the mission of the firm in mind. Finally, the competitive advantage a firm possesses should be a reflection of the firm’s mission.

13. Strategic Management: Mission Think of one example (a leading company). What is the mission of the company? Do you think this firm could change what they do and how they do it given their respective mission?

14. Strategic Management: Objectives Objectives are specific and measureable targets. The things a firm needs to ‘do’ to achieve its mission My mission is to give students a remarkable and superior experience to succeed in their jobs, and therefore their life. (In order to do this, I need specific and measureable objectives to direct my work) My objectives is to improve students’ managerial skills and knowledge.

15. Strategic Management: Objectives Objectives are specific and measureable targets. My objectives is to improve students’ managerial skills and knowledge. Specific: the focus is on students’ skills and knowledge Measureable: for example through exams (can measure students’ knowledge) and through succeeding in work (skills can be measured later when they finish collage) Objectives should influence/direct other elements in the strategic management process

16. Strategic Management: Objectives Again, Objectives “The things a firm needs to “do” to achieve its mission” So, objectives are the things a firm should “do” or is it the “targets” a firm needs to achieve? • Answer: • Objectives should flow from the mission of the firm • Objectives are specific and measureable targets that a firm needs to reach in order to carry out its mission • To reach the targets, the firm needs to accomplish a set of tasks or activities – “do”

17. Strategic Management: Mission and Objectives The mission and objectives of a firm should serve as the basis or background for the strategic management process A firm’s mission and objectives should inform the analysis done in every other segment of the model

18. Strategic Management as a Process: External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Internal Analysis

19. Strategic Management: Internal and External Analysis External analysis – a systematic examination of the environment in which the firm operates (phenomena external to the firm) Internal analysis – a systematic examination of a firm’s resources and capabilities Internal Analysis External Analysis • Human resources (knowledge) • Laws and Reg. • Demographics • Manufacturing abilities • Social trends • Technology • Technology

20. Strategic Management: Internal and External Analysis -External and internal analysis enable a firm to make appropriate strategic choices. -For example, External and internal analysis are intended to enable managers to recognize sources of possible competitive advantage by identifying unmet needs in the external environment (external analysis) and the firm’s abilities to meet those needs (internal analysis).

21. Strategic Management: Internal and External Analysis Example: Steelcon Shoes goes through an analysis of the external environment and its internal environment (resources) whenever it considers introducing a new line of shoes. This analysis helps them identify opportunities (e.g. unmet needs) and threats (e.g. regulations or environmental concerns that affect their operations) in the external environment to which they should pay attention. It also helps them to recognize what strengths (e.g. have skilled workforce) and weaknesses (e.g. low design abilities) they have as a firm.

22. Strategic Management: Internal and External Analysis External and internal analysis are critical steps in helping a firm determine what its theory will be regarding how to achieve competitive advantage. Eisner’s theory may have been: After visits to the parks and intensive analysis of the external and Internal environment, “Eisner thought that people will pay a premium price for extraordinary entertainment [opportunity]. We have the necessary resources[strength] to create extraordinary entertainment. Therefore, let’s redeploy our resources in a different way and offer something extraordinary to people.”

23. Strategic Management: Strategic Choice Strategic choice is the point in the process where managers choose how to organize and position the resources of the firm. -Meaningful strategic choices can be made only when managers understand the external and internal environments they face - Strategic choices are made at two levels: the business level and the corporate level

24. Strategic Management: Strategic Choice • Strategic Choice can be: • Business level strategic choices deal with the positioning of a given business, • A business may be positioned at the top of the market—high quality, high price, it may be positioned at the lower end of the market—low quality, low price, or it may be positioned somewhere in between these extremes • - Corporate level strategic choices determine in which businesses a firm will operate or decisions that will affect the entire group Eisner thought that people will pay a premium price for extraordinary entertainment [opportunity]. We have the necessary resources [strength] to create extraordinary entertainment. Therefore, let’s redeploy our resources in a different way [Strategic Choice to organize and position the resources]… update the theme parks and offer something extraordinary to people [focusing on providing extraordinary services with higher price, business level]… Buying ABC, hotels, etc [new businesses, corporate level]

25. Strategic Management: Strategic Choice • Notes: • Many firms operate in more than one business (several business units). • Firms may choose to manage each business differently (have different business level strategic choice for each business unit). • Firms may make corporate level strategic choice any time it considers expanding into a new business. Thus, even small firms make corporate level strategic choices as they decide which business they will enter and which they will not.

26. Strategic Management: Strategy Implementation Strategy Implementation: - • How managers carry out the strategic choices they make • Whowill do what (responsibility) • Implementation issues: Organizational structure (hierarchy) and control • Who reports to whom • How does the firm hire, promote, pay, etc.

27. Strategic Management: Strategy Implementation Strategy Implementation: - -Implementation issues are important. -For example, implementation issues affect how ‘happy’ people are working for a company [e.g. compensation may impact employees happiness, low pay means low happiness] . If your strategy is to offer customers an extraordinary entertainment , unhappy employees can be a serious liability [a problem ]. - So it is not only important to formulate strategy, but also intensive attention should be given to strategy implementation and related implementation issues.

28. Strategic Management: Strategy Implementation Summary of Strategy Implementation: • A successful formulated strategy, may turn to a big failure when it comes to implementation • Every strategic choice has implicit implementation issues associated with it. • Different strategic choices may call for different implementation responses.

29. Strategic Management: Competitive Advantage Competitive Advantage: the ability to create more economic value than competitors, and it is the desired end state of the strategic management process • All other elements of the strategic management process are aimed at and undertaken to achieve competitive advantage • Competitive advantage is the result of doing something different and/or better than competitors

30. Strategic Management: Competitive Advantage Competitive Advantage, there is something about a firm’s offering to the market that allows the firm to realize greater economic value than competitors • Question: why you choose to join An-Najah National University over others? • What are the desirable characteristics of An-Najah National University that encouraged or made you prefer it over others?

31. Strategic Management: Competitive Advantage Competitive Advantage, there is something about a firm’s offering to the market that allows the firm to realize greater economic value than competitors • The difference in economic value come about in several different ways: • Preferences/Differentiation: It could be that the product offered or the way it is offered causes people to prefer it to the point that they are willing to pay a higher price for the product and/or choose it over others (doing something different) • Cost Advantage: It could be that the firm has figured out a way to produce and distribute the product at a lower cost than competitors (Wal-Mart, doing something similar but better than competitors)

32. Strategic Management: Competitive Advantage Temporary and Sustainable - Competitive advantage typically results in high profits - Profits attract competition - Competition limits the duration of competitive advantage in most cases Therefore, - Most competitive advantage is temporary - Competitors imitate the advantage or offer something better

33. Strategic Management: Competitive Advantage Some competitive advantages are sustainable if: -Competitors are unable to imitate the source of advantage -No one conceives of a better offering Of course, -In time, even sustainable competitive advantage may be lost

34. Strategic Management: Competitive Advantage Competitive Advantage depends on consumers’ taste and what they want at a given point in time. -Thus, - A competitive advantage can fade away due to changes in consumer preferences even if competitors do not compete away the advantage For example, SUVs /4-Wheel cars in the US (GM, Ford, etc)?

35. Strategic Management: Competitive Advantage Competitive Parity: Competitive parity means that a firm and/or its output are viewed as being about the same as other firms, or in other words, about average in the marketplace. - firm’s offerings are ‘average’ - people do not have a preference for the firm’s offering • the firm does not have a cost advantage over others • Example, Jeans Clothes? Discuss.

36. Strategic Management: Competitive Advantage • Competitive Disadvantage, causes might be: • potential customers may have an aversion (preference not to buy) to a firm’s market offering, Why? • the firm may have a cost disadvantage • a firm may have outdated technology/equipment • a firm may have a negative reputation • Example, WalMart? Discuss Advantages and Disadvantages.

37. Strategic Management: Competitive Advantage Measuring Competitive Advantage: • Superior Economic Performance is viewed as evidence of competitive advantage • It is rather easy to see the evidence of competitive advantage (i.e. superior economic performance) • Measuring the source of the advantage per se is typically impossible • If there are several potential sources of competitive advantage within a firm, then the measurement issue becomes even more inexact

38. Strategic Management: Competitive Advantage Measuring Competitive Advantage: Two Classes of Measures: 1) Accounting Measures • ROA, ROS, ROE, etc. that exceed industry averages 2) Economic Measures • earning a return in excess of the cost of capital

39. Strategic Management: Competitive Advantage Competitive Advantage Economic Returns Advantage Above Normal • exceeding expectations Parity Normal • meeting expectations Disadvantage Below Normal • failing expectations

40. Strategic Management: • Emergent vs. Intended Strategies • The strategic management process leads managers tointended strategies • However, • Conditions often change or new information becomes available • Therefore, • -Managers respond and adopt emergentstrategies

41. Strategic Management: Summary This course is not about mere survival, it is about thriving— achieving Competitive Advantage • The strategic management process helps managers achieve competitive advantage • Competitive advantage depends on differences • Strategy is about discovering and exploiting these differences

42. Strategic Management: Summary • -You can use the process to identify and exploit difference between you and others • You can use the process to determine if you want to stay with a company • Strategy is often the difference between stumbling through life and moving ahead with purpose